Photo by Blake Wisz on Unsplash
Like in failed marriages, business divorces are a nightmare. Why do business partnerships often end in divorce? They end, largely, because they’re not based on solid legal foundations.
In other words, not enough legal groundwork is laid in advance.
You’ll want to seek advice from a qualified business attorney and tax professional. They should have knowledge of your sector and have experience in the formation of partnerships.
When considering a partnership, several topics need to be discussed and agreed upon.
Only then, should all details be part of a signed agreement.
As it is, the ups and downs of a business create stress.
Trying to resolve issues when your company is mired in emotional turmoil without a written prior agreement is a recipe for disaster.
It only leads to debatable controversies, emotional outbreaks, broken friendships, divorces, ruined professional images, and usually expensive litigation.
Again, all of this is preventable.
Not to give legal advice, I strongly recommend you obtain qualified legal and tax advice – every person, business and locale are different.
This is mainly to apprise you of the typical issues.
Here are the basics for which you should prepare:
1. Structure
Decide what business structure is best for you and your partner, such as a limited liability partnership (LLP) or S Corporation. This is where the professional counsel starts to be vital.
In an LLP, for example, one person will be the general partner. The others need legal protection in case of undesired behavior by the general partner.
You also should plan in advance the organizational chart; the roles of each person; benchmarks; and how decisions will be made, especially when there are differences of opinion. Even with the best of planning, cash flow issues result in disagreements. For success, you must avoid fights over money.
Trying to resolve issues when your company is mired in emotional turmoil without a written prior agreement is a recipe for disaster.
2. Sources of capital
Determine where your company will get its funding and contingencies – what will happen if the business needs more money –will it be an outside source providing funds or will the partners cough up the money.
You also need to decide who will participate as the result of their sweat equity. In other words, get an agreement on the written expectations for each participant.
3. Compensation
This is where it gets a little tricky. It’s easy to set up the percentages of ownership for each of the participants.
Not to be overlooked are other matters. They include vesting schedules, reserving stock for future employees or investors and how to allocate profit and loss – will they be commensurate to equity in the company or will there be equal shares?
You need a written definition of profits. For instance, there’ll come a time when you need to reinvest. You’ll also have to plan for partner distribution. Qualified people can best advise you.
4. Exit strategies
“Business marriages” as in other types of relationship don’t always last forever. Trust me, it happens. Health concerns arise for partners, some pass away, and people change their plans.
As a result, some partners want to cash out their involvements or demand they the company be sold when the others want to continue operating the company.
Therefore, your partnership agreement must state what will be permitted to occur. That might even include rights of first-refusal and buy-sell agreements.
5. Resolving disputes
You and your partners need to agree in advance on how you’ll break stalemates in the event of conflicts. This is often needed when a partner is leaving.
Your options include agreeing to arbitration clauses or mediation. At the launch of the business, everyone should agree on the selection of a forensic accountant to evaluate the assets to avoid contentious fighting. Another option would be to plan formulas for determining who gets what.
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“Character is tested when you’re up against it.”
-Dick Vermeil
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